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4 April 2007

Farm commodity price rises a sign agribusiness on track for drought breakthrough

Farm commodity prices are on par with the highest levels in 20 years suggesting that if recent rains continue farmers should look positively towards 2007, according to the latest Regional Economic Report from Westpac's Senior Agribusiness Economist, Justin Smirk.

Mr Smirk, commenting on Westpac's Autumn Regional Economic Report, said good performance in recent Westpac-NFF Farm Commodities Indices and growing industrial demand for carbohydrate products are signs that agribusinesses should get ready to act when weather conditions improve.

"The biofuels industry, particularly regarding biodiesel and ethanol products, has caused a fundamental shift in demand for grains and sugar away from human consumption. This shift won't change the way commodities behave but it will continue to drive new markets and maintain prices," Mr Smirk said.

"The big caveat around the biofuel industry is its reliance on government policies. The Australian government is focussed on increasing local ethanol production which is an encouraging step, but this is an international trend that countries like the US are activity engaged in as well.

"In addition, Brazil is a powerhouse agricultural economy with enormous capacity for expansion. They can easily increase production in grains, livestock and sugar without needing to clear rainforest land. If Brazilian sugar production matches its potential we could see a flow on effect in global prices. We need to monitor this long-term concern for our local producers."

The Autumn Report also examines farm debt and general economic conditions, with Mr Smirk confident that an enthusiastic outlook for the local economy is still warranted.

"No doubt farm debts have risen because of the long-term drought and smaller farms in particular need time to regain viability, but overall the industry is ready to rise to opportunity. Producers entered the current drought with relatively high levels of farm equity and liquid assets like farm management deposits have not been diminished," Mr Smirk said.

"Westpac has maintained an at times unfashionable optimism for the Australian economy – yet now with a positive quarter from NSW and continued momentum in VIC, the resource sector is not the only success story, although a divide between resource-rich states versus south-east states persists. One cause for concern is that, especially in WA, the booming resource sector has reached capacity constraints."

For Graham Jennings, Westpac's General Manager Regional and Agribusiness Banking, outlooks for 2007 suggest that producers who have planned well during the adverse conditions will reap rewards quickly.

"Winter crop predictions are very strong and we have every confidence that, given a reasonable season, farmers can put their drought recovery into action. Rural communities have already proven their resilience in previous droughts and shown how they can take advantage of the technological and productivity improvements to generate a rapid crop or livestock recovery," Mr Jennings said.

"In the future farmers will face a number of challenges like changes in water and natural resources management, access to new biotechnology, changing international diets, and this move to renewable fuels, all of which will impact on the nature and intensity of land use and agricultural productivity. At Westpac we are actively looking at ways to work with our customers to give them every opportunity to meet new demands and realise their financial potential."

Westpac's Regional Economic Reports, distributed quarterly to Westpac's agribusiness customers and staff, examine broad trends and economic forecasts for agribusiness industries and provide Westpac customers with the insights they need to plan for their long-term business viability.

With over 450 staff in Regional and Agribusiness banking, 150 experienced Agribusiness specialists who are passionate about their work, Westpac is committed to delivering the right long and short term solutions for its customers.

For more information talk to your local Westpac Agribusiness Banker or call your Grain Beef, or Dairy Industry Specialist on 1300 134 979.